Apathy –financial security’s biggest enemy
Monday 12th September, 2020.
Thirty-three years ago when I bought my first briefcase and suit, and meandered into financial planning, the world was very different than it was now.
Financial products were designed for maximum profit for the provider and the customer was an afterthought, if a thought at all.
The many regulators since then have sought to tidy this up and have been pretty successful.
Whether it was the expensive inappropriate sales products or sales tactics, there are now few places to run, but of course, they still exist and rely on one important customer failing.
Apathy. If I could change just one thing, it would be that.
The feeling that it’s just going to be fine, and that backing up a bad decision is better than opening up a complicated subject that is as exciting as licking cardboard covered in cardboard sauce.
This led many to hold onto endowment policies long, long after they were fossilized.
In 1993, I banned their sales due to the inaccuracies they had in costing. It was simply incorrect. That, coupled with rigid tax rules, tax inefficiency and excessive charges (the first two years premiums used to disappear in commissions) aligned them to the jelly advisers were sticking to a tree (the customer).
The alternative tax efficient, flexible, and accessible Personal Equity Plan alongside some life insurance dwarfed the endowment in terms of flexibility and value, but the endowment would pay ten times the commission.
Banks and financial ‘advisory’ firms with targets, needed to sell ten of one to meet the other. Commission bias? Only one outcome!
Whilst most of all bias is gone, laziness has not, and poor quality products or ‘one size fits’ all is still abundant.
Customers expect that banks or large branded institutions put the customer first.
An easy challenge to that is the choice some institutions give their customers.
Does the adviser firm just tie to one financial services firm to make things easy for them, or do they loyally stay, independent to ensure full choice and value to customers?
The result of being tied is that customers can be herded into products that are available, rather than what suits, whereas an Independent Financial Adviser will ensure the best available solution from the thousands available.
Examples: The unaware customer arriving into the bank today to send some money abroad to buy a house, or have their pensions sent abroad.
Looking for safety and convenience with their £10,000 transfer, they trust the brand yet the bank just use their own service.
NatWest and RBS offer €10,456, Barclays, €10,691 and Nationwide, €10,731 after its £20 charge.
A simple move to Revolut offers €10,991, or for those who like to use a broker rather than online or apps, top of the tree is the trusty Torfx with €10,944.
Apathy cost: €535 for a straightforward electronic cash transfer that the best broker is still making money on!
Another example I have quoted before is that of Pension performance. I took a £100,000 pension fund over twenty years and compared the income in retirement after that growth.
The best fund offered £407 per week, but your neighbor who packed their pension fund away and did not look at it, found themselves with the worst performing pension fund (a household name) and would be struggling with £91 per week. £316 per week for life - The staggering cost of apathy in their pension planning.
Another easy win is that of life insurance. Those running their own business could swap their personal life cover to a relevant life policy, which would have a significant saving in their premium as the company pays it. If the individual pays the premium it’s from net income and costs c46% more than if the company pays the premium.
The same also applies to personal life cover. A quick comparison between the cheapest (£41.22) versus the 14th placed company (£74.98) is really quite staggering. That is £10,128 over 25 years.
Naturally, when you move to uncompetitive banks or tied agents who aren’t Independent, the difference through lack of competition could be even worse.
As for mortgages…!
Peter McGahan is Chief Executive Officer of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
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